In 2008, a retirement fund filed a class action (the “Class Action”) in the Southern District of New York, asserting claims pursuant to Section 11 of the Securities Act related to debt offerings underwritten by the Respondents in the instant case. The Class Action was filed on behalf of all persons and entities that purchased the securities in question. In 2011, CalPERS brought individual suit asserting the same claims and relying on the same facts presented in the Class Action.

Subsequently, the District Court issued a notice of settlement to the class and granted each class member the right to opt-out of the settlement. CalPERS did so. The District Court then dismissed CalPERS’s claims as untimely pursuant to Section 13, because by 2011, when CalPERS filed its individual complaint, more than three years had passed since the securities in question were offered to the public. The Second Circuit affirmed the District Court’s ruling, relying on its decision in IndyMac.

CalPERS ARGUMENTS

In the brief filed in part by Tom Goldstein, who will presumably argue the case for CalPERS, the pension fund argues that the Second Circuit’s ruling in IndyMac and in the instant case conflict with the Court’s holding in American Pipe, and thus must be overturned. In American Pipe, the Supreme Court held that Rule 23 of the Federal Rules of Civil Procedure provides that the filing of a class action commences the action for all class members, named or unnamed, and tolls the limitations period for the cause of action if the class action fails. CalPERS argues that pursuant to American Pipe, as a putative member of the Class Action, it cannot be time-barred by Section 13 from asserting the claims it filed in 2011.

CalPERS argues that the Court can rule consistent with American Pipe by either: 1) holding that CalPERS’s action was timely regardless of tolling because it was a member of the timely filed Class Action; or 2) holding that the time for CalPERS to file its complaint was tolled by the filing of the Class Action. In addition to its arguments regarding the language of Section 13 and American Pipe, CalPERS relies on two other arguments concerning efficiency and due process.

CalPERS claims were timely regardless of tolling

First, CalPERS argues that pursuant to the plain language of Section 13 the instant “action” was “brought” in 2008 when the Class Action Complaint was filed. Pursuant to the Court’s ruling in American Pipe, CalPERS argues it was a member of that class action. CalPERS asserts that the fact that it later brought an individual complaint should not affect this analysis. CalPERS supports its arguments by relying on the discussion of Rule 23 in American Pipe, in which the Court opined that Rule 23 was designed to increase the efficiency of class actions. CalPERS asserts that if class members are required to file individual complaints to preserve their right to opt-out in the future, the entire purpose of Rule 23 will be undermined and the courts will be flooded with duplicative filings. CalPERS also points to that fact that such a rule would run afoul of the constitutional right for plaintiffs to opt-out of a class action, as by the time a class is even certified in these types of complex securities cases, Section 13’s three-year limitation may have already run, thereby precluding the ability of plaintiffs to make an informed decision (or a decision at all if they are not aware of the suit until they receive class notice) about whether or not to opt-out of the class action. Finally, CalPERS asserts that its logic is supported by the purpose of limitations periods, that is to “thwart the revival of stale claims and provide defendants with notice of their potential exposure to liability.” Here, CalPERS argues, Respondents were put on notice by the filing of the Class Action Complaint in 2008, and such notice fulfills thus the purpose of Section 13’s three-year limitations period.

The time for CalPERS to file a complaint was tolled

Second, CalPERS argues that while Supreme Court precedent clearly holds “that under a statute of repose, the time to initiate a claim cannot be equitably tolled, that reasoning does not apply to the distinct doctrine of American Pipe tolling, under which the claim is initiated by the timely filing of the class action complaint.” CalPERS contends that the Second Circuit erred in its ruling in IndyMac when it held that American Pipe does not apply to Section 13’s three-year limitations period because that period is a statute of repose and thus cannot be tolled in any respect.

CalPERS asserts that Section 13’s three-year period is a statute of limitations and not a statute of repose. However, even if the period is a statute of repose, CalPERS argues that American Pipe applies equally to statues of limitations and repose. CalPERS reasons that while the Court has recognized that statutes of response generally may not be tolled, the underlying purpose of this rule is to give “peace” to defendants by ensuring that new claims cannot be brought against them after a certain period of time. CalPERS argues that the non-equitable tolling set forth in American Pipe is consistent with this purpose because it “does not foreclose tolling if the plaintiff’s claims was already timely filed . . . .” Thus, CalPERS argues that even if the Court holds that its action was not timely filed because it was somehow distinct from the Class Action Complaint, and even if Section 13 is a statute of repose, American Pipe allows for non-equitable tolling because such tolling is not inconsistent with the legislative purpose of statues of repose.

CalPERS asserts that the Second Circuit erred in its interpretation of the tolling rules in IndyMac because it misunderstood American Pipe tolling as equitable in nature and misapplied the Rules Enabling Act’s prohibition on the abrogation, expansion, or modification of substantive rights. CalPERS contends that the Second Circuit incorrectly concluded that because statutes of repose give defendants the substantive right to be free of liability, the Supreme Court’s interpretation of Rule 23 cannot modify repose periods. CalPERS argues that Rule 23 and American Pipe are purely procedural rules and that the fact that they affect a litigant’s substantive rights does not place them in the purview of the Rules Enabling Act. Thus, CalPERS contends, IndyMac was wrongly decided.

Amicus Briefs in Support of CalPERS

Amicus briefs in support of CalPERS have been filed by several states, public pension funds, private funds, law professors, corporate directors, and retired federal judges. The amici’s arguments focus on how American Pipe and IndyMac affect state regulatory enforcement, unique costs borne by and fiduciary duties of institutional investors, corporate defendants’ interests in efficient claim resolution, empirical evidence related to the efficiency of claim resolution pursuant to American Pipe, and special considerations related to federal case management.

Clearly the resolution of this case will have serious consequences for institutional investors, as it will determine whether putative class members must file individual complaints before the three-year period imposed by Section 13 runs its course, in anticipation of potential future opt-outs or failure of class certification. This blog will provide a further update when the Respondent files its brief.

Joel Rothman is an Associate in the firm’s Boston office. He advises institutional investors with respect to securities class actions, with a focus on evaluating opt-out opportunities and foreign actions. He regularly advises clients at all stages of civil litigation, from pre-litigation counseling and investigation through discovery, trial, and the appeals process.

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